Compliance & Ethics
Jessica Donohue Image
Jessica Donohue
Senior Specialist

A comprehensive guide to M&A due diligence with a 20-point checklist

December 23, 2022
0 min read
Professional considering the points of the mergers and acquisitions due diligence checklist.

Starting or expanding a company or being part of a merger or acquisition carries many opportunities. It also brings many risks. When considering a merger or acquisition (M&A), it’s crucial to consider all elements; doing your M&A due diligence is a prerequisite.

It’s vital to consider the company’s debts, liabilities, problem contracts, litigation risks, intellectual property risks and much more. Acquiring a private company carries even more risks because they haven’t stood the test of the markets, and buyers have less access to information from public sources.

Either way, it’s not a process you want to hurry through, regardless of how attractive the offer may be. The best and most secure way to ensure due diligence is with due diligence technology that provides critical and comprehensive insights. Choosing the right due diligence software and working through an M&A due diligence checklist are the first steps in tackling mergers or acquisitions.

What Is M&A Due Diligence?

An obvious question might be, “what is due diligence?” and more specifically, “what is M&A due diligence?”

As part of your wider governance, risk and compliance (GRC) strategy, M&A due diligence plays an important role. Expanding your business by acquiring or merging with another can be exciting. But it can also pose compliance challenges.

Why Is M&A Due Diligence Important?

When you start to consider these issues, it’s easy to see that when you’re looking to acquire or merge with another organization, M&A due diligence is vital.

The reasons why M&A due diligence matters now include:

  • Corporate compliance is a hotter topic than ever. Businesses must comply with applicable regulations and legislation — and evidence that they are doing so. If you’re looking at M&A activity, you need confidence that the companies in your sights apply the same rigor to compliance that you do.
  • Anti-bribery and anti-corruption requirements are ever-growing. Any company you buy or merge with has to have the same standards of ethics and business integrity as you.
  • There are also financial imperatives; if you’re considering an M&A, you need to ensure you’re not opening your company to unexpected risks. Establishing the financial position of the business you want to merge with is essential.
  • Reputation risk can be a real threat to today’s corporations. An M&A that potentially jeopardizes your company’s reputation can have severe repercussions — a watertight M&A due diligence process can help to prevent this.
  • It’s more important than ever that you’re on top of issues like ethics, provenance and sustainability. Legislation that mandates approaches to these throughout the supply chain makes it essential for companies to manage their own and their suppliers’ track records here. And of course, this ESG due diligence is also highly relevant if you’re buying another business.

Building a robust anti-bribery and anti-corruption program requires performing regular due diligence on third-party intermediaries. This protects your organization’s reputation, attracts investors and clients through transparent and ethical practices, and defends company leaders from personal liability. But how much and how often should this due diligence be conducted?

At a minimum, the following 20 items should be on all companies’ merger and acquisition due diligence checklist:

20 Items That Should Be on Every M&A Due Diligence Checklist

1. Financial Matters

Buyers should ask for a full report of financial statements and metrics for the past, present and future when carrying out M&A due diligence. Ask for documents related to the audit, 401(k) balance, accounts receivable, current and contingent liabilities, and all other financial matters. Of particular concern is whether the company has the capital to continue operating through the acquisition.

2. Technology and Intellectual Property

M&A IT due diligence is important. As part of the M&A due diligence process, buyers should inquire about the scope of the seller’s technology and intellectual property, including information on patents, trademarks, copyrights, licenses and trade secrets. Carefully evaluate any problems, disputes, encumbrances and litigation over technology and intellectual property.

3. Sales and Customers

Buyers will want to gain a good understanding of the company’s customers and sales approach. Discussions should focus on customer retention, issues with risks related to product concentration, customer satisfaction and unusual product return activity.

4. Strategic Fit With Buyer

Buyers should explore whether there’s a strategic fit between them and the company they want to acquire. M&A due diligence questions should include: whether the company has products, services and technology that the buyer doesn’t have and whether key people will expect to stay on — or if the company can expect them to stay on — after the acquisition.

5. Material Contracts

One of the most time-consuming parts of due diligence is reviewing all of the material contracts and commitments of the company. Buyers will want to pay special attention to contracts that would adversely affect the company if they were terminated.

6. Managerial or Employee Problems

Due diligence in M&A situations should include an exploration of labor disputes and problems, employment agreements, compensation plans, retirement benefits and the potential for layoffs.

7. Litigation

Sellers should provide buyers with an overview of past, present or threatened litigation as part of the M&A due diligence process. This includes injunctions, settlements, consent decrees, matters in arbitration, insurance claims, threatened governmental proceedings and judgments.

8. Tax Matters

Both parties in a merger or acquisition should share and discuss tax information for the last five years, including federal, state, local and foreign income sales; government audits; IRS Form 5500 for 401(k) plans; tax sharing and transfer pricing agreements; correspondence with taxing authorities; and settlement documents with the IRS and other government taxing authorities.

9. Antitrust or Regulatory Matters

Due to increased scrutiny over antitrust matters, any M&A due diligence checklist should include an analysis of the scope of antitrust issues. The acquisition may require getting approval from a regulator. Discussing and verifying any prior antitrust or regulatory inquiries or investigations is important.

10. Insurance

All mergers and acquisitions due diligence activities should include a review of every type of insurance policy, including health insurance, E&O, D&O, liability, property, umbrella, workers’ compensation, car, intellectual property, key man insurance and employee liability insurance.

11. General Corporate Matters

It’s standard practice for the seller to offer up all organizational documents and general corporate records as part of the M&A due diligence process. These include charter documents, tax authority certificates, lists of subsidiaries, meeting minutes, and lists of officers, directors and security holders.

12. Environmental Issues

Environmental issues run the gamut from environmental audits, testing, environmental permits, EPA notices, potential Superfund exposure, asbestos exposure, contractual obligations, use of petroleum products, records of public agency investigations, and any records pertaining to environmental litigation or claims. As we’ve mentioned, the growing focus on sustainability makes understanding the environmental track record essential to due diligence in M&A transactions.

13. Related Party Transactions

Buyers should enquire about agreements or arrangements between the company and any current or former director, officer, employee or stockholder that entitles them to compensation or where they may have an interest in any asset. These are called related party transactions and should be included in any M&A due diligence

14. Governmental Regulations, Filings and Compliance With Laws

M&A due diligence in the area of governmental regulations includes things like citations, notices or pending or threatening investigations or governmental proceedings. This area includes material reports to government entities, costs of regulatory compliance, and the status of all government permits and licenses.

15. Property

Due diligence in M&A should also include a review of all property, including deeds, leases, deeds of trusts and mortgages, title reports, other interests in real property, operating leases, conditional sale agreements, financing leases, and sale and leaseback agreements.

16. Production-Related Matters

Merger due diligence reviews may include due diligence on production-related matters, such as lists of subcontractors and suppliers, manufacturing summaries, schedule of backlog orders, inventory reports, supplies, service contracts, and other agreements related to research, development, manufacturing and testing of the company’s products.

17. Marketing Arrangements

The M&A due diligence process includes a review of the company’s marketing strategies and arrangements, including sales, distributor, agency and franchise agreements. It also includes sales literature, price lists, catalogs, purchase orders, agreements and press releases.

18. Competitive Landscape

Purchasing companies will want to know the target company’s principal current and anticipated competitors. They’ll also be interested in technologies that could make current technology or manufacturing processes obsolete and the advantages or disadvantages between them and their competitors.

19. Online Data Room

The success of mergers and acquisitions depends on both parties having access to an online data room or virtual data room. The best virtual data rooms have search capabilities for all documents, the ability to bookmark and print pertinent documents, and a due diligence checklist provided by the buyer to cross-reference and review. The virtual data room should have a disclosure schedule, and any updates to the data room should be automatically notified to the buyer’s counsel.

20. Disclosure Schedule

The company should prepare a comprehensive disclosure schedule addressing all of the issues stated above very early in the planning stages of the M&A due diligence process.

How Can Software Help With M&A Due Diligence?

As you can see, mergers and acquisitions transactions involve a substantial amount of due diligence by the buyer and its counsel. A robust due diligence solution can play a vital role and ensure that this process goes smoothly, complicated as it is.

Software can enable all relevant M&A due diligence documentation to be curated and visible to all interested parties. It can ensure that all steps in the mergers and acquisitions due diligence process are addressed, and findings captured.

You can read more about the importance of M&A due diligence, the role of a due diligence checklist in mergers and acquisitions and the benefits virtual data rooms and other M&A due diligence software can deliver, in Diligent’s whitepaper, Implementing a Risk-based Due Diligence Program.


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